What is Working Capital

Part of the balance sheet, a working capital forecast is essential for any business plan. A working capital forecast in deficit can lead to insolvency.

Working Capital and Solvency

Recognised in the balance sheet, net current assets (current assets less current liabilities) broadly describe the working capital of a business.

A working capital deficit can signify technical insolvency, which is why when planning a business the balance sheet forecast is at least as important as the one for profit and loss.

Current Assets

When producing profit and cash flow forecasts using Figurewizard, an analysis of forecast assets and liabilities both current and long term is generated.

Apart from cash and marketable securities, the principal current assets are those associated with core trading activity such as accounts receivable and stock / inventory that will reasonably be expected to be turned into cash within twelve months.

Other current assets will represent prepayments; for example for insurance premiums, deposits and prepaid letters of credit. 

Current Liabilities

Current liabilities on the other hand are all debts falling due for payment within twelve months, regardless of whether or not they have been incurred in the pursuit of trade.

These will include payments due to suppliers of goods, services and overheads, VAT, corporation tax, bank overdrafts (which are always assumed to be repayable on demand), asset finance repayments and other loans.

All represent a charge to working capital.

Financing Short Term Working Capital Deficits

The problem with using borrowings to cover cash flow shortfalls is that they cannot be allowed to become a long term habit. External finance is a temporary expedient, not a cure.

However where seasonal businesses are concerned there may well be a month or more during the quiet time of the trading year when working capital may not be able to deliver sufficient cash flow to pay the bills the bills on time.

When forecasting and planning your business using Figurewizard it is always important to check for monthy deficits which can be found in the monthly cash flow, bank and finance budget.

If that indicates some months to be in deficit it will important to revise the business plan, including the level of short term borowings such as the bank overdraft or other loans in order to eliminate them.

The What-If Calculator and Planner is ideal for this, having been designed specifically for the purpose.

FAQs
How to calculate liquidity and short-term liquidity How to calculate markup and margin The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 How to make profits and not run out of cash Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions Depreciation What is Business Operating Activity What are Fixed Assets Liquidity and Cash Flow Balance Sheet Liabilities and Leases Stock or Inventory Control What is Distressed Stock or Inventory What is Interest Suspense Account Product Safety Laws What is a Bill of Exchange What is Payment at Sight What is a Pro Forma Invoice What is a Bill of Lading What is a packing note What is Demurrage Cash Flow Forecasts and Planning Factoring: Invoice Discounting and Cash Flow How Does VAT Work Figurewizard as a Sales Aid for Factoring and Invoice Discounting